The Road to Recovery: Starts at Home

Source: By Doug Durante, Clean Fuels Development Coalition • Posted: Thursday, February 11, 2021

Economics 101 teaches us the way to increase value of any product is to increase demand for that product. In the case of ethanol our historic increase in production has been a result of a corresponding demand increase, driven by a combination of renewable requirements, tax incentives, and just plain value.

With tax incentives long gone and RFS requirements leveling off, new demand will require creativity and further defining our value. A recent report by economists at CoBank looked at Forces that Will Shape the Ag Economy in 2021. It acknowledged that the ethanol industry is recovering but seemed to define success as simply getting back to where we were pre-pandemic.

In an interview about the CoBank report, one of the authors told Brownfield News that growth in ethanol demand is not going to happen in the US and the industry needs to increase exports, citing China and Brazil as a “gigantic market”.

Without a doubt, the export market is something we don’t want to ignore. We have a product that improves air quality and reduces the level of toxic aromatics that all countries can benefit from. However, the export market exists at the whim of the country we are exporting to, and we have seen just how tenuous that can be. The whipsaw relationship we have with China may improve but remains rocky. Brazil recently reinstated their duty on U.S. ethanol that our producers say is “devastating”. Furthermore, Brazil is growing corn, producing corn ethanol, and significantly increasing their export capabilities with a future rail system to the coast that could allow them to be a low-cost exporter of both corn and ethanol.

There is little to indicate this is anything but a long-term trend that is unlikely to reverse itself.  For those who suggest Europe is an option, the baby steps they are taking in terms of ethanol blend volumes—sometimes in single digits– makes it a tiny market. Furthermore, a number of EU countries are actually considering banning any ethanol made from grain products as the food versus fuel argument simply will not go away.

The economics are questionable as well. The CoBank report predicts a 20-23 cent margin per gallon. How much of that do we want to give back in transportation costs by shipping ethanol around the globe? I stress that we do not want to give up on the export market but it cannot be a foundational building block for the future.

In that interview it was stated that there is little if any chance for increase in demand here at home. If we accept the limitations of 15% blends and caps imposed by the RFS then the author of the report is right –demand will level off here.

Well, I am certainly not willing to put up the white flag with respect to our opportunity to increase domestic ethanol demand. And that brings us full circle to our economics 101 lesson:  increase demand by further increasing our value.

The CoBank economist called China and Brazil a gigantic market. While that may be true for China, the US consumes more gasoline than any country in the world and is “gigantic” enough that we need to focus on what we can still do here. And we can do plenty.

The changing political landscape of the elections and the bi-partisan concern over carbon emissions and potential climate change is an opportunity for biofuels to be a major contributor. Two opportunities are likely to surface early in the new Congress and the Biden Administration. The first is anything to do with Covid-19. The fact that the virus is transmitted through the air ties it to particulate emissions, which we know we can reduce through ethanol blends. Second is what will certainly be a re-boot of the fuel economy rule. Our message and value proposition is simple: if the objective of the fuel economy rule is to increase efficiency while reducing carbon, higher ethanol blends can do the job. The key to unlocking that deliverance is to raise the minimum octane standard in gasoline.  Automakers will adjust engines to take advantage of high octane, resulting in lower carbon emissions and increased efficiency. Because that octane cannot come from the toxic aromatic compounds in gasoline, it opens the door for doubling current ethanol blend volumes. Blends up to 30% could increase auto mileage by up to 7%.

The health benefits of reducing the toxic compounds currently used for octane are significant and as noted, the airborne transmission of all viruses would be reduced.

President Biden has made his desire to ramp up Electric Vehicles quite clear. With nearly 270 million gasoline powered vehicles on the road today, and less than 2 million EVs, this will be a long and complicated endeavor. While that is being pursued, we have an opportunity to extend and decarbonize the hundreds upon hundreds of billions of gallons of gasoline that will remain in the market over the next decade or more.

So with all respect to our friends at CoBank who have financed many of our ethanol plants, lets focus on reinforcing to policy makers at all levels our value proposition that will allow us to build on the RFS and tap into the largest gasoline market in the world. The ethanol industry needs to let the new Administration know of our low carbon value—for both climate and health– when used in higher blends and urge EPA and the Department of Transportation to remove barriers to higher octane. They asked for comment on octane when fashioning the current rule. When they revise that rule lets make sure they get the message.

Export demand will be icing on the cake but the cake is here, at home.